Marunouchi Capital Has a Formula for Success in Japan's Mid-Market Private Equity Sector: Here's How it Works

Over the past two years, M&A activity has declined across Asian market. Japan, however, stands out as an exception, with deal values increasing in both 2023 and 2024. Despite this upward trend, Japan’s M&A market still remains relatively small compared to larger markets like the United Kingdom and the United States. What is your perspective on this contrast between Japan and the global M&A landscape?

Japan was indeed one of the slower countries to emerge from the COVID-19 pandemic, with its return to normalcy trailing behind many other parts of the world. I was living in Los Angeles until 2021, and upon returning to Japan, I was still required to wear a mask everywhere for two weeks—while in LA, life had already begun transitioning back to normal. However, we’ve since witnessed a renewed interest in the Japanese market, reflected in the increased inflow of foreign capital and a rise in M&A activity. This momentum builds on the foundation laid by Abenomics and subsequent government policies, which have helped both domestic and international players recognize the untapped value within Japanese enterprises and technologies.

Japan currently boasts one of the most active M&A deal flows in Asia. In fact, Japan has never been a small market—it remains the second or third largest in the region, and today, it leads Asia in terms of M&A activity. This resurgence is largely fueled by a combination of factors: succession challenges among aging business owners, large corporations refocusing on their core operations by divesting non-core assets, and a rising trend in corporate de-listings. Before the pandemic, many CEOs were in their mid-60s; now, they’re approaching 70, while their children in their 30s. This generational shift is accelerating succession-related transactions. It’s not only a result of ongoing corporate governance reforms, but also a broader demographic challenge tied to aging leadership.

Looking at today’s private equity deal flow—which has accelerated notably over the past two years—two major drivers stand out: corporate governance reform and a structural, generational shift resulting from Japan’s aging boardrooms and CEOs. These are changes that have been building for over a decade. What kind of impact do you foresee in the short- to mid-term? Do you expect this momentum to continue, or are we nearing a peak that could lead to a slowdown in the years ahead?

I don’t believe we’ve reached the peak yet. In fact, we’re currently working with an increasing number of succession-related and privatization deals. One example from our deals last year is our partnership with Nagatanien, a 250-year-old company that is a household name in Japan. We’re now collaborating closely with the founding family on a number of initiatives. This deal gave us solid publicity among family-owned businesses, and other founding families have since approached us to work with them. We see this trend continuing well into 2025.

The increase in M&A deal flow provides a large investment universe for private equity funds. Especially in the mid-market segment, where we identify and cultivate proprietary deals. We do not yet see the kind of intense competition you often find in domestic real estate deals, where 10-20 bidders go after the same property. At this stage, that level of saturation just doesn’t exist in Japan’s mid-market private equity space.

We also work with founders and management teams from an early stage to discuss about options, come up with strategies together, and establish goals. Some deals may not happen for years, but we work closely with the companies to solve their issues.

Taking into account the challenges facing the Japanese economy, including a lack of consolidation in the SME sector and the impact of the ageing workforce, what value can private equity bring to the Japanese economy as a whole?

A study by the Japan Private Equity Association found that companies under private equity ownership in Japan saw an average 10% increase in employee numbers. That stands in contrast to the U.S., where private equity ownership often coincides with reductions in headcount.

In Japan, many of these businesses were previously poorly managed—resources were tied up in unproductive areas, and leadership was often reluctant to pivot away from outdated business segments. Private equity firms tend to take a more disciplined, strategic approach, carefully evaluating what truly benefits the company in the long term.

In Japan, many CEOs remain entrenched in the “status quo,” relying solely on existing internal resources. However, a company has both shareholders and stakeholders, and creating long-term value to drive sustainable growth should be the top priority. One of the strengths of private equity is its ability to institutionalize a value-driven mindset—not only by leveraging internal resources, but also by implementing external expertise. I believe many CEOs in Japan are beginning to recognize these benefits and have started to actively engage with us. Moreover, when preparing a portfolio company for sale, our goal is to ensure that the next acquirer is well-positioned to deliver long-term value.

A good example of the value private equity can unlock can be found in our deal with TOSEI, formerly part of Toshiba. When we invested, it was reliant on a tightly knit group of local suppliers located in Japan, which limited the company’s potential. We broadened its network—looking beyond its immediate ecosystem and beyond Japan—to find better suppliers and partners. We also supported their international expansion, most notably in Taiwan, where we launched a franchise model and successfully grew the business from the ground up.

Once those structural issues were resolved, the company became far more attractive and was ultimately acquired by the Swedish company Electrolux Professional. This deal illustrates how thoughtful restructuring can create value not just for investors, but for the broader economy.

Private equity’s positive track record in Japan—alongside structural reforms and improvements in corporate governance—has helped drive a significant shift in perception. From your perspective, how have attitudes toward private equity evolved within Japanese boardrooms? And over the long term, do you see Japan moving toward a model more similar to the U.S., where M&A is regarded as a natural part of the corporate life cycle?

Having worked in private equity in the U.S. until 2010, I can say the differences compared to Japan are significant. In many areas of finance, Japan tends to trail the U.S. and private equity was no exception at that point. Unfortunately, the early days of private equity in Japan were dominated by firms that resembled vulture funds. Some transactions were perceived as exploiting Japanese taxpayers, which created a lasting negative image of the industry during its formative years.

But much has changed over the years. Today, Japan has a growing number of well-established private equity firms and seasoned professionals, helping to solidify private equity as a lasting and integral part of the country's financial landscape.

At its core, private equity plays a revitalizing role: it streamlines operations, eliminates inefficiencies, and helps bring companies and industries back to life to elevate the economy itself to the next level. In the U.S., this process often went hand-in-hand with broader industrial shifts as laid-off employees frequently found new roles in fast-growing sectors like IT, fuelling further economic expansion. In Japan, that kind of mobility and sectoral transition hasn’t occurred as readily until now.

Private equity here performs an essential function: it helps release human capital trapped in stagnant industries, redirecting it toward more dynamic and innovative sectors. In doing so, it contributes to Japan’s broader economic transformation.

When I began working in private equity in the U.S. 20 years ago, the industry was in the early stages in Japan. Today, the landscape has changed dramatically. A major reason for that shift is the growing familiarity with M&A—both among founder-owners and large corporations. There’s a better understanding now that selling a company isn’t like entering a lifelong partnership; rather, it’s about finding the right steward to take the business forward.

When Marunouchi Capital invests in a company, what is the core value you aim to deliver through your involvement?

Let me give you a concrete example by explaining our work with Queen’s Isetan, the supermarket arm of retail company Isetan Mitsukoshi Holdings. At the time of investment, the company had around USD 500 million in sales but struggling in profitability.

Over a four-year period, we worked with our partner, Isetan Mitsukoshi Holdings in restructuring the business to increased profitability significantly. We held a 66% stake, while the original owners retained 34%. Notably, we’re one of the few private equity firms in Japan that acquires a majority stake and later have sold our stake to the original owners.

Based on our successful track record with Seijoishii, a high-end supermarket similar to Queen’s Isetan, the company’s external directors — who were former CEOs from blue-chip companies — chose us as their value-creating partner, resulting in a proprietary deal. Furthermore, the employees of Queen’s Isetan also recognize us as a strategic partner based on our track record in the retail and supermarket space. Ultimately, we generated a great return on our investment, with most of the value creation driven by EBITDA improvements.

Taking from our previous playbook with other supermarket companies, we executed this structured buyback plan but first improved gross margins by introducing a broad range of private label products. On the marketing front, we implemented a more strategic PR approach by leveraging on social media and web campaigns.

In-store, we made significant improvements. We brightened and modernized the interiors and facade, ensured food items were always stocked.

Labor efficiency was another key focus, we reduced overtime by 46%. We identified that many employees were working unnecessary morning shifts, so instead of remunerating overtime, we introduced a profit-sharing model at the store level. This incentivized smarter staffing, particularly during low-traffic hours, and substantially reduced overtime costs.

By leveraging Mitsubishi Corporation’s network, we achieved modest but meaningful value creation. Additionally, through a co-purchasing partnership with Seijo Ishii, a former Marunouchi Capital portfolio company, we were able to expand the lineup of attractive wine offerings. We also expanded sales of in-house products to other supermarkets, many of which had limited prior experience with private brand offerings. We also sold private label product from Queen’s Isetan to Jaya Grocer, a high-end supermarket in Malaysia owned by our sister company, AIGF, creating an entirely new revenue stream.

We also made improvements on packaging cost. The packaging of Queen Isetan’s products could vary from store to store, so we centralized it and announced a bid to find new suppliers. Mitsubishi Corporation Packaging Ltd. won that bid and began to take care of the packaging of Queen Isetan, allowing us to further reduce cost.

After those changes were implemented, the EBITDA increased significantly. We sold back our 66% share to Isetan Mitsukoshi Holdings, a significant gain. However, as they held a 34% stake throughout the process, their stake also grew in value. In March 2022, during the pandemic, the company stood out as the only department store to report extraordinary profits. It was widely recognized in the media as a textbook example of how private equity can work hand in hand with Japanese corporates to transform core subsidiaries.

This deal wasn’t won through a competitive bidding process but rather as a proprietary transaction. In Japan’s M&A landscape, trust plays an especially critical role. How do you approach that dimension—not just as a buyer seeking returns, but as a long-term partner to the investee and its previous holding company?

In Japan, word of mouth carries significant weight. The work we did on that particular deal opened the door to future opportunities and I believe that holds true for other private equity firms as well.

Our approach is straightforward: we work side by side with our partner until the problem is solved. We have a team of 34 people, but you will rarely see them at our office as they are all at our portfolio companies or searching for new deals. This hands-on approach is how we do things. We work directly within the companies we invest in, engaging with the CEO, CFO, and frontline managers. It’s not a passive role. We do whatever is needed to deliver real, measurable results.

What do you consider to be the greatest advantages of operating within the Mitsubishi ecosystem?

When we acquire a company, Mitsubishi often explores opportunities to jointly bid for new businesses with that company, leveraging synergies to create additional growth avenues. However, as a fiduciary, Marunouchi Capital’s primary responsibility is to our LP investors, so if involving Mitsubishi doesn’t create value for the portfolio company, we will not pursue the collaboration.

That being said, Mitsubishi brings substantial business opportunities to the table. When the partnership aligns strategically, it has a direct and positive impact on profitability.  

For example, one of Mitsubishi’s greatest strengths is its international network and expertise, which are key attributes when supporting Japanese companies beyond the domestic market. This is an area where Marunouchi Capital and Mitsubishi Corporation collaborate particularly well.

Just a few weeks ago, for example, we supported one of our portfolio companies, Cypress—which operates a variety of restaurant brands—in exploring expansion opportunities into the Philippines. Leveraging Mitsubishi’s strong corporate relationships in the region—especially with major mall operators—they provided invaluable support. This included help with logistics and transportation, coordinating meetings with potential partners, and scouting viable restaurant locations. That kind of hands-on, ecosystem-level support is a clear advantage of being part of the Mitsubishi network.

What types of companies are you targeting as you look to deploy the remainder of your fund’s capital?

We primarily focus on the consumer sector and manufacturing, which are our core areas of expertise. While we’re open to exploring opportunities in IT and other sectors, our strongest capabilities are in sectors where we can fully leverage Mitsubishi’s logistics and distribution network.

Your fund size has remained consistent at around JPY 100 billion across Funds I through III. What’s the reasoning behind maintaining that level of consistency?

Fund I was originally structured as a pilot initiative, with commitments exclusively from the Mitsubishi Group, Mitsubishi Corporation, Mitsubishi UFJ Bank and Mitsubishi UFJ Securities (formerly Mitsubishi UFJ Morgan Stanley Securities). It was designed as an experimental fund to test and validate our investment model.

For Fund II, the structure evolved: Alongside the capital commitment led by Mitsubishi Corporation and Mitsubishi UFJ Bank, we have also secured commitments from 20+ external investors.

By the time we launched Fund III, the shift continued. Although Mitsubishi Corporation maintained its commitment, the majority of the capital came from external investors, including Japanese and non-Japanese investors, making Fund III the largest in terms of LP funding.

We’ve consistently targeted a fund size of around JPY 100 billion because most of the opportunities we pursue are in the mid-cap space. That’s where we’re able to source proprietary deals, which are a core strength of ours. In contrast, large-cap deals often involve highly competitive bidding processes, which we generally prefer to avoid. Proprietary deals allow us to take a more strategic approach and deliver greater value through active engagement.

As the proportion of capital from LPs has increased over time, how has that shift impacted the internal dynamics of the firm from a strategic standpoint?

We’re constantly fine-tuning our funds. Fund I was more experimental in nature. With Fund II, we welcomed our first limited partners from outside the Mitsubishi shareholder base and focused on control-based buyouts as our core investment strategy. By Fund III, we had really refined our approach as we now had a solid winning playbook.

At this point, we’re very comfortable operating across markets. We have a strong pipeline and the strategy has become repeatable. It’s about executing well and doing the right kind of deals over and over again.

Do you view your dual focus on consumer sector and manufacturing as a potential hedge against geopolitical uncertainty?

COVID presented significant challenges, and Japan’s heavy reliance on imports, particularly for natural resources, makes the country especially vulnerable to global disruptions. That’s why we’ve taken a cautious and strategic approach when it comes to sector focus.

For Fund III, we made a deliberate decision to target industries with strong tailwinds. When we were fundraising for Fund III, the global environment was highly uncertain as elections were underway all over the world and global conflicts were escalating. To navigate this uncertainty, we decided to focus on tail-winded industries, aligning ourselves with resilient, growth-oriented sectors. This approach actually allowed us to attract and reassure LPs.

At the same time, we remained disciplined on deal size, which allowed us to continue sourcing proprietary deals. These are the areas where we see the greatest potential to enhance operations and, in turn, achieve our targeted returns. It’s a strategy that not only helps us navigate external volatility but also plays to our core strengths.

In sectors like restaurant and retail, technology has become a key driver of value creation, especially with the rise of AI and advanced operational tools. What is your perspective on the role of technology in enhancing business value? And could you share an example of how you’ve applied technology in one of your portfolio companies to improve performance or profitability?

Let me highlight an example from Fund II and our investment in Graniph, a T-shirt manufacturer. When we first got involved, only about 15% of their sales came from outside their physical stores, and most of that was through third-party platforms, which significantly eroded their margins.

We addressed this by building a direct-to-consumer e-commerce site. As a result, direct online sales now represent around 35% of total revenue, eliminating the margin loss previously incurred through third-party channels.

What makes this model particularly effective is the high level of customer engagement. Graniph customers are passionate about the brand’s characters and seasonal collaborations, and many of them are repeat buyers. With the new system, those returning customers can easily make purchases because they already know their size and preferences.

This wasn’t about deploying cutting-edge technology. It was about implementing the right technology tools to take control of the sales channel and improve the customer experience. It’s a clear example of how operational improvements, supported by technology, can create real value.

You recently partnered with Sunny Side Up Inc., a PR and communications firm, to enhance the public relations value of your portfolio companies. What are your expectations for this partnership in terms of strengthening brand image and increasing visibility for your portfolio companies?

SUNNY SIDE UP Inc. has supported us in three of our Fund II portfolio companies, and they’ve done an outstanding job. PR is an incredibly efficient marketing tool, far more cost-effective than traditional TV advertising which can cost millions of dollars. Given our mid-cap size of our portfolio, this made more sense. Partnering with a firm like SUNNY SIDE UP Inc. allows us to achieve strong, targeted results. They’ve proven to be a fantastic partner in helping us elevate the brand image of our portfolio companies.

Is there a particular deal you’re especially proud of? What makes it stand out to you?

One deal I’m particularly proud of is our work with TOSEI, formerly part of the Toshiba Group that we ultimately sold to Electrolux Professional. From the beginning, we identified Electrolux Professional as a strong potential buyer and we maintained proactive discussions with them throughout the holding period.

Timing played a key role. When COVID hit, demand for the company’s products surged. They specialized in commercial coin laundry machines capable of cleaning items like futons, as well as vacuum packaging machines used by supermarkets to extend food shelf life. During the pandemic, demand for newly developed products in both categories surged significantly.

While this demand has since stabilized with the end of the COVID-19 pandemic, it played a key role in strengthening the company's management foundation and positioning it for continued growth. Recognizing this strong business performance, Electrolux Professional stepped in and acquired the company at a competitive price, making it a well-timed and successful exit for us.

Over the past year, there’s been a notable increase in attention on Japan’s M&A and private equity space. On the one hand, strategic buyers like Electrolux Professional are showing renewed interest. On the other, a surge of capital flowing into the mid-cap segment has heightened competition. In this evolving environment, what do you see as the key factors Marunouchi Capital must focus on to remain competitive?

It’s true that we’re seeing more international private equity players entering the Japanese market and setting up offices in Tokyo.

For these firms, establishing a strong local presence is essential, especially when it comes to collaborating with domestic lenders, consultants, investment banks, and other key partners. Without well-established relationships, securing financing can be a challenge.

In contrast, we benefit from a cost advantage and strong access to capital, not only through our fund, but also through our network of trusted lending partners. That combination allows us to move efficiently and remain competitive in this environment.

With growing emphasis on ESG—particularly among foreign LPs and institutional investors—how do you view the role of ESG integration in your investment strategy? Are you planning to implement more ESG-focused initiatives across your portfolio companies?

Yes, we’re definitely moving in that direction. The presence of several European investors in our fund has further strengthened our commitment to ESG. Two years ago, we signed on to the UN Principles for Responsible Investment (UNPRI), marking a formal step in that journey.

I had prior experience working with ESG frameworks during my time in the real estate asset management sector, which was years ahead of private equity when it was related to ESG matter. So, when I transitioned into this role, I made it a priority for Marunouchi Capital to embed those principles across our portfolio. Looking ahead, we always plan long-term to place even greater emphasis on ESG as we continue to evolve our investment approach.

Marunouchi Capital will be celebrating its 20th anniversary in three years. By that milestone, what are the key goals or achievements you would like to have realized?

By our 20th anniversary, we’ll likely have exited several investments from Fund III and be actively fundraising for Fund IV. We also anticipate that the definition of mid-cap private equity will continue to evolve: what was once considered up to JPY 100 billion may shift closer to JPY 150 billion. With that in mind, we’re planning for Fund IV to be sized accordingly.

Another key objective is to further expand our base of non-Japanese investors. In Fund II, we had just one. For Fund III, that number has grown to ten, and we aim to continue expanding. While we deeply value our domestic investors, the increasing interest from international LPs reflects a broader shift as global investors rebalance their portfolios and seek opportunities beyond USD-based markets—especially as Japan remains a focus destination.

That said, this outlook goes beyond Marunouchi Capital. More importantly, I hope to see Japan’s private equity sector as a whole continue to grow—playing a vital role in revitalizing the Japanese economy, supporting the global expansion of domestic companies, and contributing to broader market development across Asia.

For more information, please visit: https://www.marunouchi-capital.com